The world is on its way back to normal
This analysis is written before the Russian attack on Ukraine on February 24th.
Shipowners’ revenue is influenced by developments in the global economy. The global economy in 2021 has to a very large extent been affected by the worldwide corona pandemic, with a number of countries enforcing intrusive infection control measures for nearly two years. In 2021, easing of restrictions in several countries led to a growth in demand for raw materials, products and thus also transport, and the global economy has again seen healthy growth, especially in the advanced economies.
In its report Global Economic Prospects, published in January 2022, the World Bank estimates that the world’s gross national product increased by about 5.5 percent in 2021. The International Monetary Fund (IMF) estimates that the global economy grew by 5.9 percent in 2021. This is the strongest post-recession growth in 80 years, and is due to the fact that easing of corona restrictions in a number of countries has led to increased demand for goods and services. Growth in emerging markets (EMDEs) is somewhat weaker and more fragile than in advanced economies. This is due to these countries having a lower vaccination rate and a lesser degree of economic stimulus packages, and that they were initially hit harder financially by the pandemic.
Intrusive infection control measures have led to extensive operational challenges for shipping companies. For an extended period of time, carrying out crew changes presented major challenges, and restrictions on port calls have delayed and made essential logistics operations more difficult. Three out of four shipping companies state that they have faced significant or very significant operational challenges in 2021 as a result of the corona pandemic. This is considerably higher than companies’ expectations at the beginning of the year, when almost half anticipated significant or very significant operational challenges. This indicates that the challenges that followed the pandemic were longer lasting and more intrusive than shipowners could have envisioned at the beginning of 2021.
The World Bank forecasts for the global economy indicate growth of about 4.1 percent in 2022. The IMF is somewhat more positive and expects the global economy to grow by 4.4 percent in 2022. Advanced economies are expected to be able to get back to pre-pandemic levels in 2022 and 2023. Expected economic growth for 2022 and 2023 in emerging markets is not strong enough to bring these countries back to their pre-pandemic levels.
There is great uncertainty associated with the 2022 forecasts. The emergence of new COVID-19 variants could prolong the pandemic and cause new challenges in the global economy. It also appears that challenges that have arisen in the supply chain will persist into 2022. This comes in addition to high volatility in energy prices, which has a major impact on both activity and price levels in a number of countries’ industrial activities. The IMF points out that other global risks may also arise, as geopolitical tensions remain high, and the ongoing climate crisis means that the probability of major natural disasters remains high.
Shipowners expect major operational challenges also in 2022, especially outside Norway. Almost three out of four companies anticipate a significant or very significant degree of operational challenges outside Norway. Only one in four expects a significant degree or very significant degree of operational challenges in Norway or Norwegian waters. At the same time, we see that there are almost no shipping companies that expect 2022 to proceed without any kind of operational challenges. This shows that the corona pandemic will affect Norwegian shipping companies also in 2022.
Increased demand for ships and higher fleet utilization
Almost two years ago, at the start of the pandemic, demand for ships fell by 1.8 percent, the first decline since the financial crisis, and with a larger percentage reduction than after 2008. Conversely, last year demand rose sharply, by as much as 4.7 percent on an annual basis, recovering lost ground. Ports operating under capacity, pandemic-related delays in orders for new vessels, and many containers backed up in the logistics chain have led to less available cargo capacity in the market. This has resulted in higher rates in several transport segments, in particular the container segment. This year, Lorentzen & Stemoco expect demand to increase further, by 5.9 percent, constituting the second year in a row with an increase.
2020 also marked the low point for fleet utilization, about 80.7 percent. Last year, fleet utilization rose to 82.3 percent, and this year Lorentzen & Stemoco expect fleet utilization to rise to 84.7 percent. Demand varies greatly between the different segments. Container vessels reached a utilization rate of 90 percent in the second half of 2020, and this has strengthened further during last year and into this year. The dry cargo market follows, with the tank and gas market next.
Higher oil price means increased activity
Developments in oil prices greatly affect Norwegian shipping companies. The price of oil mainly influences offshore activity, and thus constitutes the most important prerequisite for activity in about one third of the Norwegian foreign fleet. At the same time, the price of oil is an important factor in the transport segment, as bunker costs make up a significant part of ship operating costs. Thus, a high oil price will be positive for turnover in the offshore segments, while a low oil price contributes to lower operating costs in the transport segments
Most important for the price of oil is increasing demand, as well as production cuts introduced by OPEC+ from April 2020. Since then, oil prices have increased to the current USD 90 per barrel as a result of demand exceeding supply and inventories being reduced to critically low levels.
Increased demand for oil has led to increased activity in the offshore segments. The offshore service market picked up in 2021 after a very weak 2020. In the second half of 2021, anchor handling vessels and PSVs reached a fleet utilization of 65 percent. An increase in oil demand, strong oil prices and units sold to new markets can together generate good rates and increased fleet value in the offshore segment in 2022.